Ingredion Inc (INGR) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the Corn Products second quarter 2003 earnings release conference call. This call is being recorded. At this time, I would like to turn the call over to the Vice President of Strategic Business Development and Investor Relations, Mr. Dick Vandervoort, please go ahead.

Thanks, good morning and welcome to our third quarter conference call. It's an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charts for our presentations can be viewed and downloaded from our website and they are available 60 minutes ahead of our conference calls. Those using the website broadcast are in listen-only mode.

Today, Sam Scott, our Chairman, President and Chief Executive Officer, Jim Ripley, our Chief Financial Officer and I will conduct the call. We'll indicate as we move from chart to chart so you can follow along through this presentation. I shifted to chart 2, the forward-looking statements chart.

Our comments within this presentation may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements and Corn Products is under no obligation to update them in the future as/or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in today's press release can be found in the company's most recently filed annual report on form 10K and subsequent reports on forms 10Q or 8K. Finally, statistical and financial information is available on our website, www.cornproducts.com.

I move to chart 3, our agena for the day. Today, after this introduction, Jim Ripley will present the financials relative to the third quarter and year to date, following that, I will present the business review and comment on our 2003 outlook. We will be available to answer questions after the prepared portion of the call. Jim?

Thank you, Dick. I am now on chart four which is the financial title slide. Dick will be reviewing the fundamentals of the business in a few moments. Our financial statements are attached to our press release and I will review those statements with you and Dick will go into more details when I am finished.

I am now moving on to chart 5 which is the income statement highlights for the quarter. Net sales for the quarter of $541 million increased 13%. This is compared to a $539 million in the second quarter which represented a 11% increase. Operating income for this quarter is $45 million, up 11%. Our second quarter operating income was up 6% or $42 million.

Earnings per share, up 55 cents per share, is a 15% increase from last year's 48 cent per share. The second quarter was 50 cents which was slightly below the year before. Dick will talk to the details of this in his presentation but the summary of the story is as follows: Overall volumes are constant with last year. Margins are recovering and cash flow remains strong.

I am now moving on to chart 6 which is the net sales by geographic segment. North American sales were up 7% versus 9% in the second quarter. South American sales were up 37% versus only 17% in the second quarter while the Asian sales increased by 6% versus 13% in the second quarter. Overall, our sales were up 13%.

Moving on to chart 7 which is our net sales variance analysis for the quarter. For the total company, sales dollars increased by 13%, it represented continued price mix improvements in the Americas, however, overall volumes were the same as last year and overall currency exchange rates have improved over a very weak period last year.

Looking at North America and North America sales were up 6.7% despite a 4.4% volume decline. The volume decline in North America occurred from economic weakness in Mexico and the impact of lost sales to our customers in Canada in the Northeast due to the August blackout. We do expect to make up the lost Canadian volume in the fourth quarter as customers rebuild their inventories.

Price mix improvements added 10.8% to the total sales, about the same as in the second quarter. Price changes were instituted earlier in the year to offset higher corn and energy costs as well as the weakness in the Mexican peso.

In the South American region, we saw sales increase by 37.1% from last year. This reflects a 19% improvement and our price mix component continuing our drive to recover earlier cost increases and currency declines. Currencies in the area improved 7.3% over the record lows we saw last year during this period. Year to date, however, currency is off 16% from last year. We have now made significant progress in the currency price gap since this problem first appeared in the first quarter of last year. The 10.8% volume increase reflects continued improvement in our business in Argentina with improved volumes now also occuring in Brazil and Colombia.

In the Asia/Africa region, there was a increase this sales. This came from a 3.9% volume gain, good gains in our business in Pakistan, new volumes coming from our recently commissioned tapioca starch plant in Thailand. However, volumes in Korea were off due to weakness in the local business climate. Currency rates improved from last year by 2.1%.

This brings me to chart 8, operating income by geographic segment. North American operating income is down 5%. South American operating income is up 59% while the Asia Africa operating income is down 9%. The higher corporate expenses on this chart reflects increased insurance rates and the added corporate governance costs that we have seen this year. Once again, total operating income was up 11% from last year.

I have now turned to chart 9 which is the summary income statement for the third quarter. Looking at the gross margins, margins have improved from 14.6% to 15.5%. The dissolution of the joint marketing arrangement with MCP has moved profits that were previously below the GP line into GP. The profits from that business were previously reported as earnings from nonconsolidated affiliates.

Our overall margins on the operating level at 8.3% are about the same as last year. Higher corn, energy and corporate governance costs offset the price mix improvements. Financing cost is up $1 million, however, it is down $3 million versus the second quarter. The increase is entirely due to higher interest rates as we refinanced our debt to longer maturities in the third quarter last year.

Total debt is down an additional $22 million from June 30, 2003. Our tax rate remains at a 36% affective rate. The reduction in minority interest of $1 million represents the acquisition of the minority in Argentina.

Now, moving to chart 10 which is the estimated source of our earnings per share and changes from last year's third quarter. Last year, we earned 48 cents for the quarter. This year the net is 55 cents, or a seven cent per share improvement. Net changes in operations gave us 8 cents per share. Change volume mix added approximately 3 cents per share. Higher margins and local currencies added 1 cent per share, this represents higher local currency, pricing, cost reductions, however once again, the higher corn costs and energy cost ate into that improvement.

Currencies boosted earnings by 4 cents per share. The currencies of Argentina, Brazil, Canada and Asia were strong and they offset weaknesses we saw in the Mexican peso. Nonoperating items impacted earnings per share as follows: Higher financing cost reduced earnings per share by 1 cent. Once again, average debt outstanding was lower but the interest rates were higher. Lower minority interest added approximately 1 penny while more shares outstanding from last year cost about 1 cent per share.

I am now moving on to chart 11 which is the cash flow for the quarter. Cash flow from operations produced $67 million of positive cash flow. This includes $24 million from reduced working capital, reducing the build that we had seen in the first quarter. Net income contributed $20 million versus $17 million last year and depreciation at $25 million is approximately the same as last year. A total of $19 million was invested in the business. This was used for fixed assets to grow and protect our production base. A total of $30 million was used in financing activities. $25 million was used to pay down debt while $4 million was used for dividends.

I am now on chart 12 which is the summary income statement for the 9 months. This is the next to last financial chart. For the nine months we have earned $1.44 per share versus $1.23 per share last year. Last year's first quarter included a one-time gain of 8 cents from the sale of our enzyme business less some restructuring charges.

Chart 13 is our key ratios. Return on sales is 3.8% versus 3.9% last year. Return on capital employed is 5.5%. Once again, our long term target for this key ratio is in the 8 to 10% range. Our debt to capitalization ratio is at 33.8%, down from 36.5% at the end of the last year. Our target for this ratio is to be in the 32 to 35% range. Working capital to sales has improved to 13.5% versus 14% last year. Our net debt at this point, that is total debt less cash and short term investments, is at $548 million versus $563 million last year at this time.

I will now turn the presentation back to Dick Vandervoort for more details on the business.

Thanks, Jim. I will review our third quarter from a qualitative standpoint and then provide some comments about our outlook for 2003.

I'm now switching from chart 14 to chart 15 which is the currency update. First, the description of the chart. I have listed our currencies in the first column, our countries in the first column. In the second column, I have listed the simple average over the last 90 days of currency values for the third quarter of 2003. The third column shows how the third quarter of 2003 compares with the same quarter last year and because currencies are a moving target often, in the fourth column I have shown the difference from last Friday's close versus the average for this year's third quarter.

And now, to the content of the chart. The Canadian dollar has continued to firm significantly this year, up 12% versus the average value for the third quarter of last year and as of last Friday it is up an additional 5% versus the average of this year's third quarter. In Mexico, the peso weakened versus last year and has continued to weaken further through last Friday's close. The average for the Argentine peso in the third quarter was similar to its position in the second quarter and, importantly, 20% stronger than last year's average. As you can see, it has stayed in the same range from last Friday.

In Brazil, the real was 6% stronger than last year's average for the third quarter and has remained fairly stable since that time. It is worth noting that the uncertainty ahead of last year's presidential election drove the real to its all time low on October 16th of 2002 at almost 4 to the dollar. As can be seen from this chart, there is a lot more confidence in both Argentina and Brazil today. Unfortunately, the Colombian peso continues its multi year decline as a result of both internal concerns and the situation next door in Venezuela.

The Asian currencies appear to be a nonevent. However, the recent strength of the Korean wan which is somewhat masked in both right hand columns has slowed their economy a significant portion of which is driven by experts.

Now on chart 16, third quarter 2003 in aggregate. This quarter was marked by another double digit improvement in earnings per share led by the very strong performance in South America. A quick comment is to North America that now after three quarters, we were off to our best year to date start in the U.S. since before we spun off from the old CPC International, later called Best Foods. Across the corporation, we had another good quarter continuing our cash generation gains versus the third quarter of 2002 and finally, as stated in our press release, our new glucose channels started up in Thailand and we are underway with construction in Pakistan, as we both keep pace in increasing demand and, as significantly, continue to grow our strategically important Asia/Africa business.

I am now on chart 17, description of North America. In North America, as Jim has indicated, net sales increased by $22 million and we delivered an 11% gain in price and product mix versus virtually flat currencies on the continent. The results of annual contracting negotiations in the U.S. as well as improved price and business mix for the rest of North America was also featured in the quarter. Operating income declined by a million dollars on a 4% volume decrease.

The specifics in Canada were the lingering impact of the power grid outage that was felt in the Northeastern U.S. and Eastern Canada affected our operations slightly at the time but did cause temporary take away slow downs among our customers that continued for sometime thereafter. We caught up with a portion of the missed volume during the third quarter and, as we stated, we believe we will recapture most of the balance during the fourth quarter as demand did not dissipate with the power, no thanks to that tree in Ohio. Also, while we cannot say with absolute certainty, we believe that our business may have been affected as tourism was way off in Canada as a result of the SARS scare and tourists consume both soft drinks and beer, two important categories for us.

In Mexico, this quarter compares to last year's third quarter when we shipped high margin, high fructose corn syrup while the tax was suspended until July 12th when the tax had been reinstated. While that is a relatively short time within the quarter, it was measurable in terms of impact to comparable quarter over quarter operating income. Therefore, volumes for this year's third quarter were driven down by the lack of soft drink business based on soft drink based HFCS sales. However, we are pleased to report that cost reductions combined and, with what we would term probably term well honed coping skills, all this enabled us to generate higher operating income in Mexico offsetting HFCS volume and the earnings impact. I will speak to our NAFTA claim later.

Finally in the U.S., while this well documented soft drink industry has slowed, we generated solid operating income in the U.S. and though we haven't seen year to date through September volumes from the Corner Finders Association for member's total shipments, it appears that overall volume numbers are just slightly less than flat. Most importantly, we expect that by year's end our North American business will have greater operating income than last year even with the HFCS problem continuing in Mexico.

I have now moved to chart 18, South America. Operating income increased by $8 million while sales increased by $35 million or 37% on a double-digit volume improvement. Though the comp versus last year was easy, we believe those are strong recovery fundamentals for any business in that environment or elsewhere. We are certainly pleased to see Argentina and Brazil pulling through difficult economic times as the tone is far more upbeat than this time last year. As I mentioned, when reviewing currencies last year, this time period was most difficult for Brazil in terms of economic anxiety as the presidential elections were uncertain. What a difference a year makes.

Clearly, for us regional profitability is now on the right track. However, as I mentioned earlier, there are lingering economic concerns particularly in the Andean region from the political crisis in Venezuela. However, perhaps to belabor the obvious, we are very pleased with the performance of our management team and all of their people for delivering a very fine quarter.

Chart 19, Asia/Africa. Operating income is down $1 million on a sales increase of $4 million and a 4% volume improvement. We have now lapped the original startup of our plant in Thailand, however, we commenced operations for the second phase of our plant with our glucose channel which will supply world class glucose for that part of the Asian region. In Korea, we had some cost increases, primarily corn and energy but we were unable to pass along in pricing and the Korean economy is slowing as a result of the weakening U.S. dollar.

The good news for Pakistan is that we again enjoyed a really strong quarter, our best third quarter in history and as we project that that market for our products will continue to grow, we were in the process of building a second plant in Pakistan.

Chart 20, year to date 2003 in aggregate. Earnings per share were up 10% to $1.44 on a GAAP basis or up 17% over last year excluding 8 cents per diluted share primarily related to the sale of assets net of restructuring charge during the same nine month period, the sale of our enzyme business.

Sales increased by $161 million or 12% in volumes were up despite the Mexican situation. This, we believe, is strong earnings performance especially with the Mexican business shortfall. Last year during almost half of the same nine month period we were selling our margin leading HFCS in that country to the soft drink industry. The tax on HFCS sweetened soft drinks was rescinded last year from March 5th until July 12th and, even though we did not run at anything close to full rate, the contribution was significant.

To summarize, we have seen our strong leadership team and their staffs deliver earnings growth, strong cash generation and operations that have run well. All of this, of course, is relative to where we have come from and not to our target. We believe that our shareholders deserve a business that first, earns its cost in capital and then, exceeds it. This management team is committed to that goal.

Chart 21, the filing arbitration claim in Mexico. Now, a few words about the filing we are submitting today. Per the separate press release distributed earlier today, we have filed a $325 million claim against Mexico as a result of the discriminatory and illegal tax against HFCS sweetened soft drinks in that country. We have filed the claim pursuant to the notice filed last January and in accord with the NAFTA arbitration process as agreed to by the three constituent countries, Canada, U.S. and Mexico. The claim is for compensation covering lost profits and other damages, past and potential.

Chart 22, turning to the outlook for the rest of this year, assuming the situation remains similar to what we see now, we expect to generate 2003 results at the high end of our 8 to 12% range over last year's $1.77 GAAP earnings per share. Or, at the upper end of the range of 17 to 21% over last year's $1.63 earnings per share excluding 14 cents per share primarily related to the sale of the assets net of restructuring charge and the dissolution of the U.S. joint marketing company.

Now, looking at the outlook per region. In North America, we expect the improves we have seen thus far will continue through the end of the year. In the U.S., pricing and margins set earlier this year appear to be solid through year end and our plants are running well. Assuming we deliver the expected performance, it would be our third consecutive year of earnings improvement in the U.S. within a much improved business environment.

Clearly in 2004, we will seek additional gains in both pricing and results in margins as we believe our customers also need suppliers who are generating an economic profit. And, finally, in Mexico with the tax in place for HFCS sweetened soft drinks, our requirement is to execute the rest of our business well. Considering the results of the third quarter, we believe we were doing just that. Government and political negotiations are continuing and with greater intensity during the last five or so months versus earlier quarters. Furthermore, as we have said in this press release and in the past, our EPS estimate for this year does not assume that we will have a resolution of the tax issue.

Chart 23, the concluding outlook chart. Now, completing our comments as to the outlook for the rest of this year, as we look forward in South America this year's final quarter has a tougher comp as we were making significant progress recovering from last year's devaluations in the fourth quarter of 2002. Having said that, we project that we will have an excellent year in 2003 with very strong year over year gains and operating income, though not at the same rate that we saw in the third quarter of this year.

Asia/Africa, we look forward to the completion of another good year. Our Thai plant, with its glucose channel in operation, as well as the balance of the plant should deliver meaningful results. Of course, we expect our Pakistani business to continue to thrive.

That's it for our prepared comments. Sam, Jim and I are opened for your questions, Mark?

Thank you, very much. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star 1 on your telephone keypad. Once again, that is star 1. We will take as many questions as time allows. We would like to remind participants, if you are using a speaker phone, please ensure that your mute function is off so our equipment can reach your signal. We will pause for just one moment to assemble our roster.

Our first question today will come from Christine McCracken with Midwest Research.

Good morning.

Good morning, Christine.

Just looking at the corn market as it stands today and heading into high fructose negotiations, is it your expectation, I think in your comments you suggested that you were actually going to be able to gain pricing in high fructose this year. Do you think that's realistic given, obviously the huge benefit you are going to get from corn and, if so, can you give us some order of magnitude?

Well, Christine, this is Sam and welcome back.

Thanks.

I think that we expect the dynamics in the industry will be such that there will be a opportunity for price movement and we still feel we need that in order to get the numbers back to the returns that are acceptable. Certainly, the corn numbers are not huge right now. The gross corn number is improving somewhat but the co-product credits are a little off, at least they are moving downward as we go into next year. The overall net corn number may be improved somewhat but is not going to be that significant at the moment but we do believe that the opportunities for price increases are there, should be there and we need to get them back and with the industry having consolidated, the opportunities are there for that.

And at this point you don't see an incremental capacity coming online, is that correct?

As far as we know, there is none.

Excellent. And then, just secondly, obviously you guys have hit your debt to cap targets. You generate quite a bit of cash. Can you give us some idea what your priority is, you know, is it continuing to add capacity like in Pakistan and growing in this region or would you consider a share buy back?

Right now, Christine, we see opportunities to continue to grow. As we stated for awhile now, Asia is the region that we see our greatest opportunity, although there are opportunities throughout our world and the intent at the moment is to continue to grow the business.

As you know, we have an open share buy back program but we haven't bought shares back in sometime and we will always consider it but it is not part of the plan right now.

How about a dividend, an increase in the dividend?

That's something we consider every quarter and the Board will take action on that when they think it's appropriate.

Great, thank you.

Thank you.

Next is David Nelson with CS First Boston.

Good morning.

Good morning, David, how are you doing?

In North America, the U.S. maybe specifically and setting aside carbonated soft drinks, are you seeing your customers backing away or trying to formulate away from high fructose corn syrup as related to obesity concerns?

Absolutely not. We haven't heard anything of that and we haven't seen anything in that direction.

Okay. Anything we should be watching in terms of execution of your new boiler plans there?

It's moving along per schedule. There is nothing at the moment. Obviously, we have to go through the permitting phase first and that's on the way but there is nothing that we can report on at the moment, other than that.

Okay. The, you know, big improvement profit-wise was in South America. Would you mind diving even a little further and deeper there, please?

Well, I think we said we had volume improvement, currency improvement, price improvement and cost savings.

Okay.

So, a deeper dive is kind of tough. That business is moving along very nicely. We have said to the world for a number of years now, when we have devaluations we can fix them and I think that this devaluation was quite severe. So, as Dick mentioned in his prepared comments, the comp is not a difficult comp, however, the numbers are still very substantial and very good. So, we feel that the, some of the changes we made in the pricing environment, some of the changes we made in running the business have really come to fruition during this quarter.

It is a number that has a lot of volatility to it. Barring extreme currency or economic changes, what would you expect from South America next year?

I would expect good earnings and continued volume growth. I think the economies are starting to, as Dick mentioned there, we are seeing the beginning of a turnaround, particularly in Argentina and Brazil. As we mentioned, the Andean region is still a bit of a problem because of Venezuela so, we can't really comment on what's going to happen there but the business is performing at the level we think. We know we have ups and downs in that market, we think we can handle them fairly well but, over the long haul, it should continue to grow and improve and most people forecasting economic growth in the region so, we expect to see continued improvement.

Great, thank you very much.

Thank you.

And next, we will hear from David Driscoll with Smith Barney.

Hi, good morning, everyone.

Good morning, David. How are you doing?

Not bad. I would like to talk a little bit about North America, I'm still a little bit confused in terms of some of the results in the quarter, I think that, you know, what you said here, if I understood everything, that the U.S. was solid, that Mexico was not a negative in the quarter on a year-over-year basis and that Canada was where some of the problems were. Now, specifically though, what is a little bit confusing I find is that operating income was down while revenues were up. So, that obviously suggests that your costs were increased, they increased faster than the price gains that you guys saw there.

Could you talk a little bit about exactly what's going on because I think a lot of the questions that investors have about what's going on within the company right now concerns the profitability of your U.S. operations and how that's going to trend over time and so, if someone simply looks at your North American operations and sees operating profit down in the quarter versus the year ago levels, you don't get that warm fuzzy feeling that things are actually improving. And Sam also, if you could help us out with a little bit more with the forward look, that would also be very beneficial, I think, to people who are in the stock right now today.

I think, as Dick talked to some of it, the issue was primarily in Canada was primarily revolved around the energy crisis, the blackout that took place up there. It did hit us in Canada more substantially than it hit most of the Northeastern U.S. because it went on in Canada for about ten days and, obviously, when you get slammed down in a corn refining plant where energy goes out the disruption is there, it is substantial and our customers, many of them didn't even come back up with that period of time, they refused to come up and run. So, we had customers that were not running for an extended period and others were up and down, as were we. So, the costs associated with that blackout were substantial and I think our investors need to understand that. We don't expect those kind of things on an every day basis or once a quarter basis, certainly, it was an unusual occurrence.

Also, the volumes in Canada were off because of SARS because, as you know, the concert that was held up there to try to bring people back in so, we saw a volume shortfall in Canada as well. As we talked about Mexico, I think Dick alluded to the fact that the business was running better, we put cost reductions in place. We are moving things around to try to ship more products out of the channel and we are being somewhat successful in that. The numbers were, year over year, better. The U.S. we said that we have had a good first nine months, we said we had a strong third quarter and we said we expect to continue that, particularly for North America as we go for the rest of this year.

So, I think that, you know, the business is on track. The impact during the third quarter was primarily Canada, as I said, and we don't expect those kind of things to hit us on a regular basis and, also, we did have some cost increases in energy this year as compared to last, so, we are talking about a million bucks differential and that's something we will make up.

And just one other comment, just to make sure we have clarity. We have also said that the other, since the tax went on in Mexico, the other 3 1/2 of our plants are operating very well, in fact, we've made money since that time. So, we just had a better quarter this time. We had not lost money at all during this time frame, it just was better this quarter.

So then if I were to summarize, I would say that your U.S. division and your Mexican division are improving and we had this one time power issue in Canada, is that a fairly accurate characterization?

That's pretty much what we were trying to say, yeah.

Alright, I just wanted to be super clear on that. Okay, and the next, if I could just continue on. I have got a couple of very important questions. Mexico, there is a lot of news going on here, maybe a lot of speculation. Just like to hear your thoughts a little bit about exactly what's going on. Do we have face to face negotiations? I think you wrote in your press release that we actually have negotiations but are all of the right players sitting down at the table, do we have U.S. sugar, Mexican sugar and U.S. corn at the same table because it's my thought that without those three parties, there is very little chance for a deal but with those three parties, perhaps the opposite is true, that there is a very good likelihood? How would you characterize it?

I would characterize it as, we have all those parties sitting down at the table and those parties have sat down with the counterparts on the Mexican side in the sugar industry. However, neither government has been part of those conversations and no positions have gone back to the governments as yet. There has been an awful lot of activity, some of it has been factual, some the reporting has been factual and some of it has not but we have been here before, David, and I don't want to mislead anybody that I'm overly optimistic because of where we are, we have had good conversations and it's moving forward, better than before but we still have a ways to go to get it resolved.

We have had a great deal of support just recently from Senator Harkin in the Senate writing a very strong supportive position as well, so, all of the political activity has continued.

Mexico, as you know, has become a sugar importer which I'm sure and I hope that you find completely insulting given the fact that you have a significant investment down there, in that they are clearly acting in a fashion that seems to make very little sense, right? You are a good, tax paying company in Mexico, yet they are choosing to import sugar from, I presume, Brazil and Paraguay, I'm not sure exactly where the material is coming from, instead of actually letting your operation, your 55 operation run down there and generating local tax revenues. Is there any local support in the counties that you are in down there for, you know, to really put the pressure on the local politicians to actually get this thing back running again?

Well, that is a speech that you just wrote or read that I gave to them when I was down in Mexico directly, almost those words verbatim. There is support, the corn growers are doing all kinds of things in Mexico that they possibly can to bring this to everyone's attention, as are we. There are mixed feelings in the Mexican Congress on it but some of the very high ups are very much against what's going on, there have been some bills introduced in the Congress to stop it and, as yet, nothing has happened but, at least, there is a lot of noise going on about that issue as well. They recognize that it's not the appropriate thing to be doing.

The business press is very much on the side of discontinuing the tax as well and that this importation of sugar is --

Is crazy

Inappropriate, I was going to be nice.

Right.

Could we just have a quick conversation about capital expenditures going forward? You know, your numbers had been really sustaining capital-type of numbers and you had your Thailand project last year. I'm not quite clear on what we should all think about capital expenditures going forward. You announced your new plant in Pakistan, could you put a dollar figure on that? And Sam, it would really be quite nice if you talked a little more explicitly about what some of the other opportunities are that you see in Asia/Africa and, you know, any kind of ballpark figure as to what this could bean annual run rate on, how much money you would like to invest in that region, if at all possible.

David, I can't give you specifics on it. We talked about the areas and, obviously, I don't mean to be cute about where they are but China and India are two very strong opportunities for us and we are evaluating them both and we will continue to do so. We have not gone forward with specific on capital expenditures going forward for next year or out but we have said we do intend to grow the business and what we is done over the last couple of years, as you know, is we've cut back on capital expenditure but we've made acquisitions that have been substantial for the last few years. So, between the acquisition and capital expenditure numbers we have been looking to grow and, in fact, grown the business. That's the intent going forward but we haven't put a specific number to it as yet.

We will give the world a capital number sometime very early next year as to what we expect it to be for 2004 but we are looking, as I said earlier, to grow in the Asian environment and the opportunities are some of the obvious places that we need to be.

All I'm really looking for is an understanding as to whether or not we are going to see a huge increase in the number. It seems like there is, you just don't know, because if you take out from our old cap ex numbers what you spent in Thailand, right, and you got your boiler project that goes on for, I think, 3 1/2 years.

Right.

Then, it's very unclear to me whether or not this number goes substantially above $100 million or not for '04?

We have not given guidance on that yet, David, and are not prepared to do that yet, okay?

Okay, thanks a lot, everyone

Thank you very much.

As a reminder, if you would like to ask a question you can do so by pressing star 1 on your telephone keypad. And next, we will hear from Karen Lexmark from Merrill Lynch Investment Management.

Good morning.

Good morning, Karen, how are you?

Good. Can you give us just a little bit more specifics on the U.S. operation? I wondered if you would give us the operating income, specifically for the U.S., year over year as well as the capacity utilization rates?

We don't give the operating income by country, Karen, but the utilization rates we have stated for the grind in the U.S., only the U.S. is in the upper 90s. It calculates out to about 100 but upper 90s is good enough. On most of the finishing lines, fructose in particular, it's in the mid-80s and some people say it's higher than that but that's about it and most of the other lines are in the 80s as well. Some in the lower 80s and some in the upper 80s.

So, if you take all of finishing channels running that level, including ethanol which pulls the grind or pulls from the grind, that's why the grind is running so high. Karen asked a question earlier, Christine asked a question earlier, I'm sorry, as to whether or not we have seen any expansions in the business and my answer to that was no and that goes across the board for either grind or finishing channel capacity. So that, as we see it moving forward, obviously, the utilizations are going to stay at that level or go up.

Okay, so it sounds like what you are seeing right now is consistent with what you said about last quarter too?

That's correct, yes.

Okay. Also, I wonder if there is anything specifically about South America independent of the things you talked about, the easy comp and, you know currency, that you can either duplicate or take to maybe Asia/Africa or even the U.S. operationally with respect to sales volumes, is there anything you can take someplace else?

We said awhile ago, our center of excellence for product development and everything else would be in Latin America, and it is. I shouldn't say everything else but technology and new product development and typically we introduce those products there and then move them around the world. So, as new products come out and as we see opportunities for the movement of those products around the world, we will do that.

As far as operating excellence, we share that constantly and always have. So, that anything we are doing in Latin America that may be beneficial to someplace else gets there and, conversely, anything we are doing someplace else that Latin American can use, we move it to the Latin American economy as well. I think the advantages we have in Latin America, obviously, is the market share position that is very substantial and the fact that we have well run and very modern plants that are operating in those environments that we put cross reduction programs into. So, we will ship as much as we possibly can, move products where we can and share the learnings throughout our world.

Okay, thank you very much.

Thanks, Karen.

Thank you.

Retina Hapsubaugh with Lehman Brothers has our next question.

Good morning.

Good morning.

Just on the working capital front, are we near the 9th inning or do we still have some room for improvement?

Depends on if you are a Yankees fan or not.

No, I'm not.

Okay.

Yeah, this is Jim Ripley, I will answer that question, we think there is more opportunity. Obviously not the size that we have seen in the past. We are maybe in the 6th or 7th inning but we have continual goals to push down working capital. It's continually tied to our compensation and we are looking for best practices that we can move around the world as well. So, yeah, there is more improvement that will come, not only this year but as we go into next year.

Can you talk about your capacity utilization rates in Asia?

They vary. Obviously, since we are building a new plant in Pakistan, they are pretty good. Since we were starting up a plant in Thailand, they could be better but they will grow, we will have to grow into those. In Korea, the utilization is pretty good. It's a market where we have about 30% market share of pop tiers, as Dick calls it, with pretty good utilization. There was a bit of a slowdown in the third slowdown on volumes that we saw so they aren't as strong as they were last year but we expect them to bounce back.

And when do you think Korea will bounce back and is that going to be sustainable for a balance of 2004 as well?

The projections on the Korean economy have come down for economic growth throughout the year and it's down 2.8 to 2.9% for the year. What I have seen for next year, is a bit of a rebound coming back up in the 3.5 plus range. We think that that, obviously, will help our business if it gets back to that level. I can't forecast right now what it's actually going to do. As we look at the outlook, the outlook says it should be coming back in 20004 to some degree. Perhaps not in the robust 6 to 6.5% growth we saw before but it should be coming back. And certainly, as I listen to what's going on in the world today, it's starting to appear that some of the companies out there are starting to show some growth in that part of the world now, so, if it happens, we will benefit from it.

In the fourth quarter, I would think that your year over year comparisons in Mexico are easier than in the second and third quarter. Is that correct?

Probably a little bit, yeah.

Okay. Great. Thank you.

Thank you.

Joshua Fenton with Capelli Asset Management has a question.

Good morning.

Good morning.

Good morning.

On the filing against Mexico, where did you get $325 million, that's $9 a share, it seems like a large number?

Well, we are chuckling here a little bit but not because we think it's funny, we obviously, we said we had charges of the equipment, the loss of business and we have financial impact on our business as well. So, that as we looked at the ratings change by Moodys as a result of this and the impact on us on financing costs, it's substantial, so, it comes out to this number, actually, when you add it all up. It is a big number but it's a big impact on our business. We told you how much it costs us even if you talk to operating income loss per year, we have given indication what that is and if this thing were to go on for "X" number of years after this investment, it's a lot of money, so, we have gone after three and a quarter.

If this drags out, does that number keep going up, can you amend that number?

We can amend the number, we have taken projections on what we expect it to be. Obviously, if we were wrong by a substantial amount, we would try to bring it higher.

And if you are successful and you eventually do get paid in maybe, 2005, 2006, 2007, would you typically get a lump sum or would it be spread out over twenty years?

I don't know, I don't think that, I know that we have never been in a situation before with this kind of money being paid back by a government so, we do not know what it would be, we probably would be part of a negotiated settlement.

Has any company been successful under this NAFTA rule in recovering moneys?

Yes, they have. It's not a regular occurrence, though, let me assure you.

Okay. Thanks.

Thank you.

Alan Seymore with Columbia Management Group has our next question.

Yeah, couple questions. One is, given your comments about kind of improving parts of Mexico that you kind of offset some of the tax last year, is that an issue ultimately in terms of being able to get this suit through? And then the second question is, can you give me some sense on whether you are actually making a return on your capital return in excess of your capital costs and your newly, like Thailand and Pakistan, I mean I'm trying to figure out if you should continue to in invest there, I guess is the idea.

Well, the answer to the first question is obviously, well, I shouldn't say obviously, the shifting we are doing in Mexico is not as good as the fructose is or else we would have done it first but, it is an opportunity to at least do something and we are seeing what we can do and we are trying to find new applications in the business environment in Mexico for fructose if, in fact, we can. So, that would be a continuation in that direction and hopefully we can find enough to continue to grow that business but it's not an easy task nor are we naive enough to think that we can take a channel as large as our fructose channel and divert all of it to something else.

As to the question on return of capital in our Asian markets, obviously, we have stated our goal is to return the cost of capital in our overall business and so, that is risk adjusted by region. We have not spelled out what we are doing in various regions but I can assure you with that being the goal, we are not going to invest in something that does not have the opportunity or the expectation that it will reach the cost of capital or exceed it and that would hold true, certainly, for Asia where we have a little bit more risk than you would have in an investment in the United States.

Okay, thanks.

Thank you.

And next, we will take a follow-up question from David Driscoll with Smith Barney.

Hi, I would just like to follow-up a question on the U.S. Recent USDA data concerning the consumption of corn and the wet milling process. The USDA has some reasonably good data and they show you where some of the corn has gone, they have been indicating that in, ending in August, so they don't go through September yet, they are a little bit behind, but through August, HFCS production was down. Just kind of curious as to what you are seeing there and kind of what you think is going to happen going forward? Where do you see that basic market in the United States growing at?

And then also, if you would contrast that with your dextrose operations in the U.S.? I believe those numbers were up reasonably nicely, something like 3.9% for the overall industry. I would just like to hear about your mix in, I believe, some of your other competitors have a different mix, they are more fructose oriented and they don't have quite the same dextrose position that you do but I would appreciate if if you could review that.

Okay, let me try take them from the top on that. Definitely, there has been a corn impact for the, that the USDA would see because there hasn't been the export of corn or the expert of fructose into Mexico that had been there in prior years, so, that corn that used to go either as corn to us or as fructose from our competitors that was destined for Mexico, isn't there.

Second, yes, the U.S. soft drink business, as I commented in my prepared text, is off but as I also said because we don't have September numbers either, the industry is off very, very slightly on an aggregate basis. So, I think less than half a percent year to date August, so I don't think it's measurable.

As to specific products, dextrose is clearly our leadership product. We are number one in the U.S., we are number one in the world and it's the most profitable of all the major corn refined products but in terms of what we are doing specifically, we haven't broken that out and I don't actually know what the corn refiners data shows through month of August. I just can't, honestly, tell you.

Could you guys just --

But another comment, our dextrose business, of course, is large enough that we exported all over the world. The ARGO dextrose plant is, by far, the world's biggest dextrose plant so we supply the U.S. market as well as export markets from that facility.

So, my theory was that you guys are close with your customers, you know, the bottlers, et cetera and I'm thinking that you guys would have a little bit better perspective than the rest of us here as to where the fructose consumption numbers will be going '04 and beyond, I mean, should we be looking for flat fructose consumption in the U.S. or should we be looking for like 1 or even 1.5% type of increases going forward, what's a reasonable assumption as best as you can tell?

David, I think that, you know, if you go back in history, the bottlers were growing at 4 to 5 to 6% per year, they slowed down to 2 to 3 and then down to flat now. Pepsi has come out and, I am sure most of you have seen it, they said that they had to reinvigorate brand Pepsi because the flavors and the diets were growing and they wanted to take brand Pepsi back up. I cannot say exactly what they are going to do but I do know that there is an awful lot of, there are a lot of new products coming on to the market right now, they have fructose in them and, as a result, I would expect that, over time, we would see a slight growth but that's an expectation, not a fact.

The bottlers, obviously, would have to put their money behind the marketing of these individual products and that would determine where they go and the economy has to turn around as well. We still see a lot of folks out of work that are not able to spend the money like they might have spent before for the products that we are talking about right now, even though food is a necessity, a soft drink may not necessarily be, at a given point in time.

I don't think, I have not heard anybody say they think the soft drink business is going to go south, it's generally flat to up and that's what we are projecting.

Okay, super. Thanks a lot.

Thank you, David.

Once again, as a reminder to ask a question it is star 1. And we will take a follow-up question from Karen Lexmark with Merrill Lynch Investment Management.

Hi, in the context of your comments regarding capital allocation and the excess cash use, can you tell us when you expect to reach your targeted debt to cap goals?

Well, we are pretty much there now, Karen, we had set the range of 32 to 35 and we said we are at 33 and change at the moment, so we are in the range. I think that we will continue, Mr. Ripley is very tough in this area and he is laughing at me now, we worked together for long time, he just keeps pushing and pushing. Go ahead, Jim.

We will continue to pay down debt until we see a good opportunity for an investment and, you know, we will drive to that lower range, if a good investment comes along, we will bring it back up but we want to stay in that range.

Okay, thanks.

At this time, there are no further questions in the queue, I will now turn the conference back over to Mr. Dick Vandervoort for any closing or additional remarks.

Thank you very much, Mark, and thank you, everybody, for listening in. I will be around today if you have any further questions. Thanks so much, bye-bye.

And that concludes today's conference call. Thank you very much for joining us, you may now disconnect.